Buy and Hold: How to Perpetuate Your Investment Losses
Copyright © 2004, Ulli G. Niemann
A recent cartoon in my daily newspaper showed two guys sitting
in a bar. One is saying to the other: “I did learn something
from my broker...how to diversify my investment losses.”
While this struck me as funny, there is certainly an element of
truth to it judging by the number of tragic e-mails and phone
calls I have received over the past couple of years.
This was brought home even more so by a reader who responded
with strong disagreement to one of my articles. I advocate a
methodical, disciplined approach to investing in no-load mutual
funds. It keeps me invested during up markets and on the
sidelines during down markets. It was exactly this approach
that got me and my clients out of the market in October, 2000
and put us back in to take advantage of the April, 2003 upswing.
Judging from the reader’s e-mail it appears that he works for
a major bank and is adamant about Buy & Hold and Dollar Cost
Averaging. Maybe it's the approach he has chosen and he doesn't
like hearing that the emperor is wearing no clothes. Nothing
personal, honestly, but I find it incomprehensible that anyone,
after the bear market and the financial disasters most people
experienced, can even consider such theories. The results are
just too black & white.
Here are his three main points:
1. "There is no real feasible way to know whether the market is
going to be up or down and when exactly to invest.
2. "The only logical way for an investor to make money is
through the buy and hold approach. This method is used by
Warren Buffett and he has consistently beaten the best with
an average annual return of 29%.
3. "Dollar cost average helps to hedge against the ups and downs
of the market; moreover, one should have been buying up
stocks during the last 3 years, though I do agree with your
cashing out at in 2000. I do not wish to insult you, but
that seems to me more luck than intuition."
It appears that the only thing that I can agree with him on is,
as he says, there is no reasonable way to "know" whether the
market is going to be up or down. However, this statement
also underscores that he is not familiar with trend tracking
methodologies and the idea that one does not need to "know" or
"predict" in order to make profitable investment decisions.
I've put together the composite for my trend tracking index in
the 80s and it has consistently served me and my clients well
by getting us into and out of the markets in a timely manner.
The reader cites Warren Buffett's success. Sure, he is legendary,
but remember that he made most of his fortune during one of the
greatest bull markets. He is probably now considered beyond good
and evil. But what about the numerous stories in the press over
the past 3 years of the heavy losses he sustained in Coca Cola
and other stocks, by stubbornly holding on to this positions.
When you have enough money invested in a wide range of holdings,
you become almost bullet proof. Do you fit in that category?
Furthermore, Buffet has resources available that the investing
public simply does not have. Saying that he is successful only
because of his buy and hold approach, and everyone following
this technique will be too, is an oversimplification and does
not factor in all the issues.
How many non-millionaires have enough spare capital to keep
buying and holding and buying some more while stocks plummet?
How long can they wait for the upswing when their cost-averaged
holdings will start to show a profit? Do the math! Yes, the
market will eventually turn up. But will it recover enough fast
enough to reverse your losses in time to do you any real good?
If you're 20, then maybe. If you're 60, who knows?
I have received countless e-mails and phone calls from
individuals who have been led astray by brokers, financial
planners and others using buy-and-hold and dollar cost
averaging. Stories abound of retirees having to go back to
work just because someone told them that "the market can't
go any lower" or "let's dollar cost average."
As for his last point, when I gave the signal to cash out on
October 13, 2000, it had nothing to do with either luck or
intuition. I had no clue how good of a call that would be; I
simply let my indicators be my guide. They pointed to a sell,
we considered, and then followed through based on our
experience. We held true to our philosophy and kept our
emotions, speculations, fears or greed out of the equation.
This disciplined approach is what I advocate.
This year it has led us to buy back into the market on 4/29/03.
And my detailed analysis and evaluation of a range of funds led
us to select some of the best; my top fund being up some 50%.
So, not to be cynical, but to me dollar cost averaging is just a
way to spread the pain over a longer period of time and to cloud
the obvious with the hope the market will turn around tomorrow.
After all, it can't go any lower. Can it?
© Ulli G. Niemann
Ulli Niemann is an investment advisor and has been writing about
objective, methodical approaches to investing for over 10 years.
He eluded the bear market of 2000 and has helped countless
people make better investment decisions. To find out more about
his approach and his FREE Newsletter, please visit:
http://www.successful-investment.com
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